Is Joe Holding Berhad (KLSE:JOE) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Joe Holding Berhad (KLSE:JOE) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Joe Holding Berhad

How Much Debt Does Joe Holding Berhad Carry?

The image below, which you can click on for greater detail, shows that at December 2022 Joe Holding Berhad had debt of RM11.7m, up from none in one year. However, it does have RM73.0m in cash offsetting this, leading to net cash of RM61.3m.

How Strong Is Joe Holding Berhad's Balance Sheet?

The latest balance sheet data shows that Joe Holding Berhad had liabilities of RM23.6m due within a year, and liabilities of RM49.8m falling due after that. On the other hand, it had cash of RM73.0m and RM61.3m worth of receivables due within a year. So it can boast RM60.9m more liquid assets than total liabilities.

This surplus strongly suggests that Joe Holding Berhad has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Joe Holding Berhad boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Joe Holding Berhad's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Joe Holding Berhad wasn't profitable at an EBIT level, but managed to grow its revenue by 8.8%, to RM21m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Joe Holding Berhad?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Joe Holding Berhad lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of RM5.9m and booked a RM46m accounting loss. With only RM61.3m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Joe Holding Berhad is showing 4 warning signs in our investment analysis , and 2 of those can't be ignored...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.